Yellowstone National Park2nd October, 2014
Back in the 1970s and 1980s when I was working with the Dugdale Group at Lloyd's we had a modest commercial relationship with the securities firm, Bache & Co. I developed quite a good connection with the London manager who occasionally invited me to private seminars. I remember one in particular in 1981 when the guest speaker was the noted, sometimes notorious, investment guru, Joe Granville.
Some of you in the US will probably recall his name and when I looked on the website there were a couple of quite good obituaries following his death last year. He had an enormous following of devoted acolytes particularly among private clients. He had a unique style which included playing the piano and making rude remarks about investment management companies, frequently referring to them as ‘bag holders’.
After he had finished making his pronouncements at the Bache meeting in 1981 he asked the small assembled group if we would like to buy seafront property in the USA at 10 cents an acre. To a man we reached for our cheque books and in the process thought it wise to ask Joe exactly where this property was located. The answer was ‘Nebraska’. We looked a bit surprised, to say the least, and while we were quite happy to recognise our limitations on the geography of the USA we did suggest to Joe that Nebraska was about four states in from the West Coast.
Joe’s response was fascinating. He referred to what is called the Jupiter Effect. This was a rare concurrence when the nine major planets, including earth, would all appear in the same arc. The consequence, Joe said, would be an earthquake which would destroy the San Andreas fault line and create the most enormous tidal wave which in turn would break off the whole of the western part of the USA leaving Nebraska as the seafront. My personal scepticism was marginally undermined when one of our Names came into the office one day soon afterwards and demanded that he should be taken off all his syndicates except UK Motor. ‘Why?’ we asked, to which the response was “the nine major planets...” Such is the ability of man to (mis)interpret scientific data.
This brings me on to Yellowstone National Park. I subscribe to a daily newsletter called ‘Delanceyplace’ which provides extracts from its choice of books or publications. One of its most recent articles was an extract from A Short History of Nearly Everything by Bill Bryson about the enormous volcano forming the core of the Park. Since reading that article I have Googled ‘Yellowstone’ more than once to find that the prospect of a major eruption of this volcano has been attracting a lot of material including an article in the September 4 issue of the New Yorker. “The geysers, hot springs, mud pots and fumaroles of Yellowstone National Park are the visible face of a vast, seething ocean of molten, magma six miles deep. The super volcano beneath Yellowstone has so far erupted three times: 2.1 million, 1.3 million and 640,000 years ago. By the crude math of those who have a fearful cast of mind, this means that a fourth eruption is now due.”
You may like to read the whole article which is accessible online. Doomsday predictions of a specific kind remind me of those guys whom one occasionally sees carrying billboards with the words ‘The end of the world is nigh’. In this case, however, there is apparently a video on You Tube which has been viewed almost 1.5 million times featuring 26 bison loping along Yellowstone’s Grand Loop Road. The author of the New Yorker article describes the scene as rather cute. But there’s more, much more, with lots of scary forecasts. The article concludes with the following observation “The likelihood of it actually happening in the 21st century remains about one in a thousand according to the US Geological Survey. So while there is little need to worry about drowning in burning lava during your trip to Yellowstone there might be a need to watch what you read before you leave for vacation.”
So, what’s the point? As I have often said to our two girls, life is about taking risk. I believe that if you do not take risk, you take risk. For example, if you decide to keep your money under your ‘risk free’ mattress it will gradually be wasted away by inflation. There is a perceived risk of driving at night in ‘violent’ Johannesburg which deters quite a number of bridge players from participating in a game which they love because they won't go out at night. There is a risk that your flight might be cancelled because of a volcanic eruption in Iceland which spews ash across northern Europe. There is a risk in crossing the road, especially if you don’t look where you are going.
The business we are in is about taking risk. Insurers make a promise to pay in the event of a legitimate claim though sometimes the legitimacy is hard to prove or disprove. Warren Buffett likes to refer to the float which derives from the premiums paid upfront on which investment returns will be made and will contribute towards paying expenses and generating profits. As he puts it, the goal is that the float received in any year should exceed claims. This goal highlights the importance of accurately assessing risk/reward recognising that nature has the power to deceive and will frequently do so.
In our business we rely on underwriters analysing risk/reward, taking account of historical experience and so far as possible ‘what if’ scenarios. These ‘what if’ scenarios need to be intelligently realistic. This is not to say that the possibility of an eruption of Yellowstone National Park should be ignored but after careful consideration it might be entirely overlooked. The same might be said about the possibility of Mount Teide erupting in the Canary Islands creating a tsunami which would sweep over the Atlantic to New York. On the other hand earthquakes in California, Chile, Japan and New Zealand will never fall outside a good underwriter’s appraisal.
So, underwriters need to look where they are going and we watch over them to make sure that they do. Those insurers who are careless about the road which they travel invariably lose their way if not ultimately their business. Our job is, so far as possible, to make sure that they don’t.